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Thread: Casey Research: Oilís role in $ as reserve currency breaking down MUST READ

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    Default Casey Research: Oilís role in $ as reserve currency breaking down MUST READ

    This is the best, most concise and articulate breakdown of the geopolitics behind oil's role as the main reason for the USD $ role as reserve currency and how it is breaking down. Its from Casey Research, an excellent source in case you haven't heard of them.


    http://www.caseyresearch.com/cdd/ditching-dollar

    By Marin Katusa, Chief Energy Investment Strategist

    There's a major shift under way, one the US mainstream media has left largely untouched even though it will send the United States into an economic maelstrom and dramatically reduce the country's importance in the world: the demise of the US dollar as the world's reserve currency.

    For decades the US dollar has been absolutely dominant in international trade, especially in the oil markets. This role has created immense demand for US dollars, and that international demand constitutes a huge part of the dollar's valuation. Not only did the global-currency role add massive value to the dollar, it also created an almost endless pool of demand for US Treasuries as countries around the world sought to maintain stores of petrodollars. The availability of all this credit, denominated in a dollar supported by nothing less than the entirety of global trade, enabled the American federal government to borrow without limit and spend with abandon.

    The dominance of the dollar gave the United States incredible power and influence around the worldÖ but the times they are a-changing. As the world's emerging economies gain ever more prominence, the US is losing hold of its position as the world's superpower. Many on the long list of nations that dislike America are pondering ways to reduce American influence in their affairs. Ditching the dollar is a very good start.

    In fact, they are doing more than pondering. Over the past few years China and other emerging powers such as Russia have been quietly making agreements to move away from the US dollar in international trade. Several major oil-producing nations have begun selling oil in currencies other than the dollar, and both the United Nations and the International Monetary Fund (IMF) have issued reports arguing for the need to create a new global reserve currency independent of the dollar.

    The supremacy of the dollar is not nearly as solid as most Americans believe it to be. More generally, the United States is not the global superpower it once was. These trends are very much connected, as demonstrated by the world's response to US sanctions against Iran.

    US allies, including much of Europe and parts of Asia, fell into line quickly, reducing imports of Iranian oil. But a good number of Iran's clients do not feel the need to toe America's party line, and Iran certainly doesn't feel any need to take orders from the US. Some countries have objected to America's sanctions on Iran vocally, adamantly refusing to be ordered around. Others are being more discreet, choosing instead to simply trade with Iran through avenues that get around the sanctions.

    It's ironic. The United States fashioned its Iranian sanctions assuming that oil trades occur in US dollars. That assumption Ė an echo of the more general assumption that the US dollar will continue to dominate international trade Ė has given countries unfriendly to the US a great reason to continue their moves away from the dollar: if they don't trade in dollars, America's dollar-centric policies carry no weight! It's a classic backfire: sanctions intended in part to illustrate the US's continued world supremacy are in fact encouraging countries disillusioned with that very notion to continue their moves away from the US currency, a slow but steady trend that will eat away at its economic power until there is little left.

    Let's delve into both situations Ė the demise of the dollar's dominance and the Iranian sanction shortcuts Ė in more detail.

    (The continual erosion of the dollar could well be the tipping point that causes oil prices to skyrocket. But investors who get positioned before that happens could make life-changing gains.)

    Signs the Dollar Is Going the Way of the Dodo

    The biggest oil-trading partners in the world, China and Saudi Arabia, are still using the petrodollar in their transactions. How long this will persist is a very important question. China imported 1.4 million barrels of oil a day from Saudi Arabia in February, a 39% increase from a year earlier, and the two countries have teamed up to build a massive oil refinery in Saudi Arabia. As the nations continue to pursue increased bilateral trade, at some point they will decide that involving US dollars in every transaction is unnecessary and expensive, and they will ditch the dollar.

    When that happens, the tide will have truly turned against the dollar, as it was an agreement between President Nixon and King Faisal of Saudi Arabia in 1973 that originally created the petrodollar system. Nixon asked Faisal to accept only US dollars as payment for oil and to invest any excess profits in US Treasury bonds, notes, and bills. In exchange, Nixon pledged to protect Saudi oilfields from the Soviet Union and other potential aggressors, such as Iran and Iraq.

    That agreement created the foundation for an incredibly strong US dollar. All of the world's oil money started to flow through the US Federal Reserve, creating ever-growing demand for both US dollars and US debt. Every oil-importing nation in the world started converting its surplus funds into US dollars to be able to buy oil. Oil-exporting countries started spending their cash on Treasury securities. And slowly but surely the petrodollar system spread beyond oil to encompass almost every facet of global trade.

    The value of the US dollar is based on this role as the conduit for global trade. If that role vanishes, much of the value in the dollar will evaporate. Massive inflation, high interest rates, and substantial increases in the cost of food, clothing, and gasoline will make the 2008 recession look like nothing more than a bump in the road. This will be a crater. The government will be unable to finance its debts. The house of cards, built on the assumption that the world would rely on US dollars forever, will come tumbling down.

    It is a scary proposition, but don't bury your head in the sand because countries around the world are already starting to ditch the dollar.

    Russia and China are leading the charge. More than a year ago, the two nations made good on talks to move away from the dollar and have been using rubles and renminbi to trade with each other since. A few months ago the second-largest economy on earth Ė China Ė and the third-largest economy on the planet Ė Japan Ė followed suit, striking a deal to promote the use of their own currencies when trading with each other. The deal will allow firms to convert Chinese and Japanese currencies into each other directly, instead of using US dollars as the intermediary as has been the requirement for years. China is now discussing a similar plan with South Korea.

    Similarly, a new agreement among the BRICS nations (Brazil, Russia, India, China, and South Africa) promotes the use of their national currencies when trading, instead of using the US dollar. China is also pursuing bilateral trades with Malaysia using the renminbi and ringgit. And Russia and Iran have agreed to use rubles as a means of currency in their trades.

    Then there's the entire continent of Africa. In 2009 China became Africa's largest trading partner, eclipsing the United States, and now China is working to expand the use of Chinese currency in Africa instead of US dollars. Standard Bank, Africa's largest financial institution, predicts that $100 billion worth of trade between China and Africa will be settled in renminbi by 2015. That's more than the total bilateral trade between China and Africa in 2010.

    The idea of moving away from the dollar is also finding support from major international agencies. The United Nations Conference on Trade and Development has stated that "the current system of currencies and capital rules that binds the world economy is not working properly and was largely responsible for the financial and economic crises." The statement continued, saying "the dollar should be replaced with a global currency." The International Monetary Fund agrees, recently arguing that the dollar should cede its role as global reserve currency to an international currency, which is in effect a basket of national currencies.

    There is also a host of countries that have started using their own currencies to complete oil trades, a move that strikes right at the heart of US-dollar dominance. China and the United Arab Emirates have agreed to ditch the dollar and use their own currencies in oil transactions. The Chinese National Bank says this agreement is worth roughly $5.5 billion annually. India is buying oil from Iran with gold and rupees. China and Iran are working on a barter system to exchange Iranian oil for Chinese imported products.

    Speaking of Bartering for OilÖ How about Those Iranian Sanctions?

    The United States and the European Union based their Iran sanctions on the financial system behind Iran's oil trade. The country uses its central bank to run its oil business Ė the bank settles trades through the Belgium company Swift (Society for Worldwide Interbank Financial Telecommunication) and the trades are always in US dollars. Once they take full effect in July, US and EU sanctions against Iran will make transactions with the Iranian central bank illegal. When that occurs, this official avenue of trade will shut down. In fact, Iran was shut out of Swift a few weeks ago, so that road is already blockaded.

    But the arrogance in the sanctions is the assumption that Iran can only use this one, dollar-based avenue. In reality, the Islamic Republic is considerably more agile than that; removing its ability to trade in the official manner is only encouraging the country to find imaginative new methods to sell its oil.

    Since the sanctions were announced, Tehran's official oil sales have certainly declined. Iran actually preemptively halted oil shipments to Germany, Spain, Greece, Britain, and France, which together had bought some 18% of Iran's oil. But covert sales have curbed or perhaps even reversed the reduction in shipments. It is impossible to know the details, as buyers and sellers involved in skirting the sanctions are being very discreet, but the transactions are undoubtedly happening.

    As mentioned above, Iran is selling oil to India for gold and rupees. China and Iran are working on a barter system to exchange Iranian oil for Chinese imported products. China and South Korea are also quietly buying Iranian oil with their own currencies.

    The evidence? Millions of barrels of Iranian oil that were in storage in Iranian tankers a few weeks ago now seem to have disappeared. Officially, no one knows where the oil went. Was it rerouted? Has production been shut in? Is the oil being stored elsewhere?

    Oil is fungible, which means one barrel of crude is interchangeable with another. Once it leaves its home country, it can be nearly impossible to know where a barrel of oil originated, if its handlers so desire. And it's not just barrels that are hard to track Ė even though oil is carried on ships so large they are dubbed "supertankers" it is surprisingly difficult to keep tabs on every tanker full of Iranian oil.

    And the Iranians are using every trick in the book to move their oil undetected. In the last week it became apparent that Tehran has ordered the captains of its oil tankers to switch off the black-box transponders used in the shipping industry to monitor vessel movements and oil transactions. As such, most of Iran's 39-strong fleet of tankers is "off radar." According to Reuters, only seven of Iran's Very Large Crude Carriers (VLCCs) are still operating their onboard transponders, while only two of the country's nine smaller Suezmax tankers are trackable.

    Under international law ships are required to have a satellite tracking device on board when travelling at sea, but a ship's master has the discretion to turn the device off on safety grounds, if he has permission from the ship's home state. Some tankers turned off their trackers to avoid detection last year during the Libyan civil war in order to trade with the Gaddafi government.

    And Iran is about to gain even greater flexibility in disguising the locations of oil sales, as the National Iranian Tanker Company (NITC) is about to take delivery of the first of 12 new supertankers on order from China. The new tankers will add much-needed capacity to NITC's fleet at a time when the number of maritime firms willing to transport Iranian crude has dwindled significantly, forcing Iran's remaining buyers to rely on NITC tankers. Thankfully for NITC, the 12 new VLCCs Ė each capable of transporting two million barrels of crude Ė will significantly expand the company's current fleet of 39 ships.

    Sanctions or no sanctions, Iran is moving its oil. But even having your own, off-radar ships to transport oil bought in renminbi or rupees or won doesn't mean all these tricks and maneuvers don't have a cost.

    Freight costs for each voyage add up to nearly $5 million, a sizeable hit for Tehran. Iran is often also shelling out millions of dollars in insurance for each oil shipment, because the majority of international shipments are insured through a European insurance consortium that is backing away from Iranian vessels because the EU sanctions will make such transactions illegal.

    And since business is business, buyers are also demanding much better credit terms from the National Iranian Oil Company (NIOC) than normal. Traders are reporting agreements giving the buyer as much as six months to pay for each two-million-barrel cargo, a grace period that would cost Tehran as much as $10 million per shipment.

    For Tehran to cover freight costs, insurance, and the cost of generous credit terms wipes out as much as 10 percent of the value of each supertanker load. Beyond that, customers are also negotiating better prices. For example, the flow of Iranian oil to China did slow in the first quarter of the year, but not because China endorsed the sanctions. Rather, Chinese refiner Sinopec reduced purchases to negotiate better prices with the National Iranian Oil Company. The country's imports from Iran are expected to climb back to the 560,000 barrel-per-day level in April.

    That trade, along with non-dollar-denominated deals with India, Turkey, Syria, and a long list of other friendly nations, will keep Iran's finances afloat for a long time. The sanctions may be preventing Tehran from banking full value for each tanker of oil, but there is still a lot of Iranian oil money flowing.

    The mainstream media is avoiding all discussion of the demise of the US dollar as the world's reserve currency. Even fewer people are talking about how sanctions based on Iran's supposed need to use the US dollar to sell its oil leave loopholes wide enough for VLCCs to sail right through.

    Without acknowledging the elephant in the room, articles about Iranian tankers turning off their transponders or India using gold to buy Iranian oil invariably sound like plot developments in a spy thriller. Much more useful would be to convey the real message: The world doesn't need to revolve around US dollars anymore and the longer the US tries to pretend that the dollar is still and will remain dominant, the more often its international actions will backfire.
    "Paper money has the effect to ruin commerce,oppress the honest, and open the door to every species of fraud and injustice"

    ~GEORGE WASHINGTON



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  3. #2

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    If there is war with Iran, THIS will be the reason why.

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    I heard someone saying yesterday on the radio that WHEN CONFIDENCE IN THE DOLLAR DISAPPEARS, it's over.

    After all, our entire economy is based on CONFIDENCE, and nothing more.

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    That is correct. Lack of confidence has been the linchpin in Europe. When you loose confidence in your currency interest rates rise (because of percieved addtional risk) The central bank need operating cash they raise the debt ceiling which only amplfies the problem. When more public programs get put into place as has happened since Clinton it snowballs. It just a matter of time now. Is it 1 month, 1 year or 10 yrs? I don't know. This is one of the few peices that brings up a world currency behond the dollar. In my mind, thats where we are headed.

    Quote Originally Posted by wgadget View Post
    I heard someone saying yesterday on the radio that WHEN CONFIDENCE IN THE DOLLAR DISAPPEARS, it's over.

    After all, our entire economy is based on CONFIDENCE, and nothing more.

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    He was also talking about MORAL HAZARD...When you see people walking away from their promises to pay their mortgages, and whole countries walking away from paying their debts, it's almost over.

  7. #6
    Site Staff - Moderator Brian4Liberty's Avatar
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    Quote Originally Posted by nbruno322 View Post
    ...both the United Nations and the International Monetary Fund (IMF) have issued reports arguing for the need to create a new global reserve currency independent of the dollar.
    ...
    The idea of moving away from the dollar is also finding support from major international agencies. The United Nations Conference on Trade and Development has stated that "the current system of currencies and capital rules that binds the world economy is not working properly and was largely responsible for the financial and economic crises." The statement continued, saying "the dollar should be replaced with a global currency." The International Monetary Fund agrees, recently arguing that the dollar should cede its role as global reserve currency to an international currency, which is in effect a basket of national currencies.
    Not that this is breaking news.

    But will this new "international currency" be a basket of national currencies, or will it eventually end up being a UN fiat currency, controlled by a global Federal Reserve?

    From January 2008:

    Quote Originally Posted by Brian4Liberty View Post
    The plan all along has been the destruction of the US Dollar to set the stage for a Global currency. Shouldn't be any surprise to anyone. I'm sure when Greenspan, Wolfowitz and Kudlow get together for drinks they discuss it...

    (Wolfowitz losing his job at the World Bank was just a minor set-back.)

    And ps...It won't be based on gold or any other real asset!! Pure fiat currency, backed by the guns of the UN...
    "Foreign aid is taking money from the poor people of a rich country, and giving it to the rich people of a poor country." - Ron Paul
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    "Debt is the drug, Wall St. Banksters are the dealers, and politicians are the addicts." - B4L
    "Totally free immigration? I've never taken that position. I believe in national sovereignty." - Ron Paul


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    Quote Originally Posted by wgadget View Post
    I heard someone saying yesterday on the radio that WHEN CONFIDENCE IN THE DOLLAR DISAPPEARS, it's over.

    After all, our entire economy is based on CONFIDENCE, and nothing more.
    And one of the main reasons there is confidence in the dollar is because you need it to transact in oil - the lifeblood of the global economy. Take that away and you have a lot less confidence.
    "Paper money has the effect to ruin commerce,oppress the honest, and open the door to every species of fraud and injustice"

    ~GEORGE WASHINGTON

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    Site Staff - Moderator Brian4Liberty's Avatar
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    Quote Originally Posted by nbruno322 View Post
    It's ironic. The United States fashioned its Iranian sanctions assuming that oil trades occur in US dollars. That assumption – an echo of the more general assumption that the US dollar will continue to dominate international trade – has given countries unfriendly to the US a great reason to continue their moves away from the dollar: if they don't trade in dollars, America's dollar-centric policies carry no weight! It's a classic backfire: sanctions intended in part to illustrate the US's continued world supremacy are in fact encouraging countries disillusioned with that very notion to continue their moves away from the US currency, a slow but steady trend that will eat away at its economic power until there is little left.
    Very interesting analysis.
    "Foreign aid is taking money from the poor people of a rich country, and giving it to the rich people of a poor country." - Ron Paul
    "Beware the Military-Industrial-Financial-Corporate-Media-Government Complex." - B4L update of General Dwight D. Eisenhower
    "Debt is the drug, Wall St. Banksters are the dealers, and politicians are the addicts." - B4L
    "Totally free immigration? I've never taken that position. I believe in national sovereignty." - Ron Paul


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    Choice #2. (one fiat currency) It will happen at the exact moment in time when the dollar is collapsing because we're not all that far from it. If it took another 50-100 years I'd say choice #1.

    What we have to realize is the USA is still a very important part of the world economy. Even if we're bankrupt. Americans aren't going to go back to 3rd world stance even if we completley drive the bus off the cliff. We have an emense amount of "value" here. Oil is important, but its only important if economys are getting better. China needs us. They would crumble without us consuming their goods. The mideast would crumble without us using their oil. We consume a ton of european goods and vise versa.

    The world needs us just as badly as we need them. What everyone so easily forgets to mention is we OWN the world food supply. We have the best farmland in the world by quite a margin. We have a very low population density realitive to our resources.

    Now the thought of a world currency is terrifying in itself. Our lifestyle would be dramatically different then it is today, but we're not going to just disappear. If we totally and completley collapse (which is happening) we'll take the rest of them with us. The world doesn't want that. Currency is just a means for judging wealth between two parties. Comoidities, they are the real wealth and we have tons of them.

    Quote Originally Posted by Brian4Liberty View Post
    Not that this is breaking news.

    But will this new "international currency" be a basket of national currencies, or will it eventually end up being a UN fiat currency, controlled by a global Federal Reserve?

    From January 2008:

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    Correct to a point. The dollar is a "safe-haven" because everyone says it is. Oil is a big factor of it, but so is the economy and everythign it entails behind it.

    Quote Originally Posted by nbruno322 View Post
    And one of the main reasons there is confidence in the dollar is because you need it to transact in oil - the lifeblood of the global economy. Take that away and you have a lot less confidence.

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    London Bridge is falling down,
    Falling down, falling down.
    London Bridge is falling down,
    My fair lady.

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    Quote Originally Posted by wgadget View Post
    I heard someone saying yesterday on the radio that WHEN CONFIDENCE IN THE DOLLAR DISAPPEARS, it's over.

    After all, our entire economy is based on CONFIDENCE, and nothing more.
    Keep in mind that is central planned government counterfeiting economy is based on CONFIDENCE. Laissez-faire free market economy does not rely on fiat money. When confidence in the dollar disappears, then hard working effort seeking productive individuals become rich. Honest Sound Money FTW!
    "Everyone who believes in freedom must work diligently for sound money, fully redeemable. Nothing else is compatible with the humanitarian goals of peace and prosperity." -- Ron Paul

    Brother Jonathan

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    Quote Originally Posted by jbauer View Post
    Correct to a point. The dollar is a "safe-haven" because everyone says it is. Oil is a big factor of it, but so is the economy and everythign it entails behind it.
    Soon as the faith in the dollar dies, the credit-based economy is over.

    I hope they replace it with some kind of SOUND MONEY, as Ron suggests.
    Last edited by wgadget; 04-25-2012 at 02:14 PM.

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    Stake out the turf before the battle?
    The LAND Of Israel Forever

    www.endofhistory.info

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    80% of American voters couldn't get through that article, and if they did would have no idea what they just read. Tweeted and FBed.
    "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
    óCharles Mackay

    "god i fucking wanna rip his balls off and offer them to the gods"
    -Anonymous

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    tldnr
    Last edited by Danke; 04-25-2012 at 05:03 PM.
    Quiz: Test Your "Income" Tax IQ!

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    The Federalist Papers, No. 15:

    Except as to the rule of apportionment, the United States have an indefinite discretion to make requisitions for men and money; but they have no authority to raise either by regulations extending to the individual citizens of America.

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    (The continual erosion of the dollar could well be the tipping point that causes oil prices to skyrocket. But investors who get positioned before that happens could make life-changing gains.)
    I know he is a PM guy, but what are the investments he currently recommends?
    Quiz: Test Your "Income" Tax IQ!

    Short Income Tax Video

    The Income Tax Is An Excise, And Excise Taxes Are Privilege Taxes

    The Federalist Papers, No. 15:

    Except as to the rule of apportionment, the United States have an indefinite discretion to make requisitions for men and money; but they have no authority to raise either by regulations extending to the individual citizens of America.

  19. #18
    Member Zippyjuan's Avatar
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    For decades the US dollar has been absolutely dominant in international trade, especially in the oil markets. This role has created immense demand for US dollars, and that international demand constitutes a huge part of the dollar's valuation. Not only did the global-currency role add massive value to the dollar, it also created an almost endless pool of demand for US Treasuries as countries around the world sought to maintain stores of petrodollars. The availability of all this credit, denominated in a dollar supported by nothing less than the entirety of global trade, enabled the American federal government to borrow without limit and spend with abandon.


    Petroleum producing countries which include
    Oil exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar,
    Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria.
    presently hold $265 billion worth of US debt or 1.8% of total US debt. Last year the US had to borrow about four times that in the form of new debt. Not sure I would qualify that as "an endless pool of demand for US Treasuries" though it does put them as a group the third largest foreign holder of US debt. The list does leave off Canada ($55 billion in Treasury holdings though we buy lots of other things from Candada besides oil too) which is our largest source of imported oil and Mexico with $33.2 billion - our #2 supplier. http://www.treasury.gov/resource-cen...uments/mfh.txt Saudi Arabia, Kuwait and Iraq combined accounted for 18.2% of US oil imports.

    Now China has definately been buying US Treasuries (and is the biggest foreign holder of them) to keep their currency weak compared to the dollar- that is to keep the prices of exports to the US artificially low and give them a competitive advantage. If the yuan was allowed to float higher against the dollar, as would naturally occur if China was to convert the dollars and use them to buy something else not denominated in dollars, then the cost of goods from China would go up and it would become more competitive to start producing more of them in the US. This is the flip side of having a strong currency- it encourages more imports, fewer exports and fewer jobs here.
    Last edited by Zippyjuan; 04-25-2012 at 06:23 PM.
    I am Zippy and I approve of this message. But you don't have to.

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    It's simply amazing how spot on G. Edward Griffin was in The Creature from Jekyll Island.

    Whether it's actually a group of international socialists trying to purposely destroy the currency so we'll lose our national sovernety, or it's simply the result of decades of politicians and banks gone while, the result will still be the same...No more constitution, no more freedom, socialism for the entire globe, and a high tech feudal system for the masses...
    It's just an opinion... man...

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    all the casey articles are worth reading. I regularly read them on goldseek.com

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    This article hits the nail right on the head. What he fails to tie into it though is the outsourcing of American jobs to China and India. This to the benefit of the corporations, but to the detriment of our economy. It's another backfire. What's even more disturbing is the fact that the U.S. is now a net exporter of oil. Couple that with the building of the Keystone pipeline which will mainly be exported. It will raise the price of oil. However, because it can still be refined domestically, oil companies by selling to America will make records amount of profit.

    Ron Paul made a comment once, that globalists are very patient. This is a classic case of problem, reaction, solution that started all the way back in the 1970's or even in the early 1900's when oil was chosen to power automobiles. When the dollar collapses, people will be begging for a solution and the masses will gladly accept the new form of currency to fix the problem.

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    Quote Originally Posted by nbruno322 View Post
    And one of the main reasons there is confidence in the dollar is because you need it to transact in oil - the lifeblood of the global economy. Take that away and you have a lot less confidence.
    +1

    Yes, since people must buy dollars to get the oil, it creates artificial demand for dollars & pushes up it's value, which will come down drastically if this demand drops due to people using other currencies or gold for oil-trading; & it's really funny that the US government is doing everything to prevent people from using it for oil-trading in order to make sure that people keep using it for oil-trading ; just unique ways in which markets work!

    Quote Originally Posted by jbauer View Post
    Choice #2. (one fiat currency) It will happen at the exact moment in time when the dollar is collapsing because we're not all that far from it. If it took another 50-100 years I'd say choice #1.

    What we have to realize is the USA is still a very important part of the world economy. Even if we're bankrupt. Americans aren't going to go back to 3rd world stance even if we completley drive the bus off the cliff. We have an emense amount of "value" here. Oil is important, but its only important if economys are getting better. China needs us. They would crumble without us consuming their goods. The mideast would crumble without us using their oil. We consume a ton of european goods and vise versa.
    Let's say there's a lazy fat guy who is borrowing from everyone & enjoying a better living-standard than others who are working, producing goods & services & lending him, what happens if they don't lend him? What happens if he stops consuming all the goods & services they are providing him?
    Well, they have MORE FOR THEMSELVES!

    The idea that China or the world in general "needs" US to keep consuming their products is ridiculous, if they don't send their stuff over to the US then they can consume it themselves or send it over to someone else who'll offer them something that they need, the only reason they have been sending it over to US is, as has been pointed out in OP, they need oil & to buy oil, they need dollars but that could change pretty quickly

    Oil-trading is one of the main things that has made US dollar a "global reserve standard" but if dollars are no more necessary to buy oil then that significantly undercuts the demand & value of the dollar; even Middle-East sells oil to US because it needs to buy stuff from others & dollar has been one of the important currencies that people use to conduct all kinds of international trades, they even save in US dollars & all this is largely due to its status as oil-currency

    Quote Originally Posted by kathy88 View Post
    80% of American voters couldn't get through that article, and if they did would have no idea what they just read. Tweeted and FBed.
    You're too optimistic, I'd say 90%

    Yes but if more people actually took interest in such things then they'd understand all the war-propaganda against Middle-East & many other things
    You know Saddam wanted to trade oil in Euros & he just happened to have WMDs
    Gaddaffi had been looking to trade oil in gold & may be even create a gold-backed African currency but you know he was crazy so he had to be put down
    And now that Iran wants to use something other than dollars to trade their oil, you know they just happen to have these nukes & that's why they need to be shown their place
    There is enormous inertia ó a tyranny of the status quo ó in private and especially governmental arrangements. Only a crisis ó actual or perceived ó produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

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    Quote Originally Posted by Zippyjuan View Post
    [/B]

    Petroleum producing countries which include


    presently hold $265 billion worth of US debt or 1.8% of total US debt. Last year the US had to borrow about four times that in the form of new debt. Not sure I would qualify that as "an endless pool of demand for US Treasuries" though it does put them as a group the third largest foreign holder of US debt. The list does leave off Canada ($55 billion in Treasury holdings though we buy lots of other things from Candada besides oil too) which is our largest source of imported oil and Mexico with $33.2 billion - our #2 supplier. http://www.treasury.gov/resource-cen...uments/mfh.txt Saudi Arabia, Kuwait and Iraq combined accounted for 18.2% of US oil imports.
    Did you even comprehend what the OP was about? Even the part that you've quoted clearly says "countries around the world", not just oil-producing countries

    Once it was established that oil-producing countries were going to sell oil for dollar, there was every reason for the rest of the countries to get dollars because pretty much everyone needs oil & this creates an artificial demand for dollars, which otherwise wouldn't exist & because of this, the dollar is widely used in international trade & that in turn, creates a market for Treasuries, under the assumption that the situation will continue as it is & that people will continue to accept & want dollars in their transactions but then, a paradigm-shift will change that sooner or later

    Quote Originally Posted by Zippyjuan View Post
    Now China has definately been buying US Treasuries (and is the biggest foreign holder of them) to keep their currency weak compared to the dollar- that is to keep the prices of exports to the US artificially low and give them a competitive advantage. If the yuan was allowed to float higher against the dollar, as would naturally occur if China was to convert the dollars and use them to buy something else not denominated in dollars, then the cost of goods from China would go up and it would become more competitive to start producing more of them in the US. This is the flip side of having a strong currency- it encourages more imports, fewer exports and fewer jobs here.
    That's anti-market Keynesian tripe!
    A country having a stronger currency is able to buy REAL WEALTH (goods & services) cheaply from others, which means they end up with more money to spend elsewhere or they can invest it so that simply means that jobs that are lost in export-related businesses are transferred to other businesses catered to LOCAL CONSUMPTION; similarly, a weak currency means goods & services are flying out of the country, yes, there are more export-related jobs but that means people can buy LESS & prices are high so LOCAL CONSUMPTION is LESS & therefore jobs catered to local consumption are less.
    When will Keynesians learn about "opportunity cost"???
    An economy is a cumulative system so just focusing on aspect while ignoring all other aspects of the economy does NOT provide us with the COMPLETE picture & that's where Keynesians err.

    And China is actually keeping its people poorer by stealing their purchasing-power by devaluing their currency along with the dollar, that's NOT an advantage for Chinese PEOPLE, may be it's an advantage for Chinese government by way of higher revenue & for local uncompetitive businesses by of way profits.
    But for the PEOPLE in general, it means they can buy LESS stuff & have lower living-standards than they otherwise would have had if Yuan is simply allowed to appreciate normally when they export. Not to mention, they'd have more disposable & investable income which would fuel local consumption & related jobs rather than them subsidizing the Americans for ever worthless toilet-paper-money & debt but they have clearly bought into the Keynesian stupidity so they continue to subsidize America but eventually they'll stop, not necessarily because they have understood ACTUAL economics of the situation but because of the unsustainability of the situation.
    There is enormous inertia ó a tyranny of the status quo ó in private and especially governmental arrangements. Only a crisis ó actual or perceived ó produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  25. #24

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    Quote Originally Posted by Zippyjuan View Post
    [/B]

    Petroleum producing countries which include


    presently hold $265 billion worth of US debt or 1.8% of total US debt. Last year the US had to borrow about four times that in the form of new debt. Not sure I would qualify that as "an endless pool of demand for US Treasuries" though it does put them as a group the third largest foreign holder of US debt. The list does leave off Canada ($55 billion in Treasury holdings though we buy lots of other things from Candada besides oil too) which is our largest source of imported oil and Mexico with $33.2 billion - our #2 supplier. http://www.treasury.gov/resource-cen...uments/mfh.txt Saudi Arabia, Kuwait and Iraq combined accounted for 18.2% of US oil imports.

    Now China has definately been buying US Treasuries (and is the biggest foreign holder of them) to keep their currency weak compared to the dollar- that is to keep the prices of exports to the US artificially low and give them a competitive advantage. If the yuan was allowed to float higher against the dollar, as would naturally occur if China was to convert the dollars and use them to buy something else not denominated in dollars, then the cost of goods from China would go up and it would become more competitive to start producing more of them in the US. This is the flip side of having a strong currency- it encourages more imports, fewer exports and fewer jobs here.
    It seems economists are always looking at trends and trying to use past data to predict future events. But I'm of a mind with Steve Douglass in thinking that economics is no more of a science than astrology, it's full of arcane mathematics and technobabble but it has essentially zero predictive value.

    It is the underlying assumptions of the entire system that I wonder about, not the trends in specific indices or ratios or whatnot, since it seems to me that if the underlying assumptions of the economic system change then all of the past data is useless in predicting the future.

    That's why, from the little formal reading I've done on the subject, Austrian economics seems to make sense to me because it is based on more sound assumptions than Kensyian or Chicago economics, one being that it does not assume that anything other than individuals are the one's making economic decisions and that individuals are not inherently rational in making these decisions.

    So to me significant changes in the system will occur when a majority of people change their underlying assumptions. Right now in the USA one of those is that our country is the economically most important, and overwhelmingly so, largely based on our military strength and the dollar as the world reserve currency. My biggest question about the future is simply how much war are the American people willing to either support or perhaps demand to keep the dollar as the world currency?

    If our financial and economic crises are used to push us into war (because I don't really believe that most people actually want to be involved themselves in living through wars in their land, so they have to be manipulated into war by those that profit from it) then all bets are off, no one will be able to predict the outcome, and those that are supposedly in charge and might pretend they can are lying. No one knows what the end results from a WWIII scenario would be.

    But that leaves me hopeful that most people, even most people who actually have the power to make these decisions, will not want war and will seek to avoid it instead. Then the question becomes how far are they willing to go to stop the war mongers.

    Anyway, what signs do you look for to know that the change has already happened, and that the system has either broken or been suspended? Personally there are several I envision, the first being that the plastic economy based on credit and debit cards would stop. Another would be mass interruptions in internet service and overt open censorship of websites. A third would be co-opting television and radio broadcasts from the normal programming to some sort of emergency broadcasting. A fourth would be an attempt to limit physical travel on the interstates and airlines and such. I'm sure there are others but any if these would immediately let all Americans know that the old way's of life were OVER.

    As far as I can tell only the 4th situation is unfolding right now, but any of the other three would only take a day or two to happen so essentially collapse could happen now at any time (actually I suspect it happened in 2007 and it is now playing out).

    But what would you suggest are the most important leading indicators of imminent collapse? You seem to argue that the current system will continue to function for the indefinite future and that no matter what happens the 'normal' American way of life will continue. I don't know if you actually believe this or are just playing the role of presenting the 'status quo' version so that it is clearly understood, and honestly I don't care. But what would Zippy be looking for to tell him that there has been a paradigm shift in world geopolitics and global economics that would either negatively or positively change things for the better? Is there a way towards more prosperity and more opportunity for everyone in the world, or do you see us as getting progressively less free and less wealthy until we have a global caste system where the vast majority work for the privileged elite?

    Because it is obvious that unless we humans take it upon ourselves to change the world for the better, it will only get worse. Thermodynamics and entropy will see to that.
    Ron Paul: He irritates more idiots in fewer words than any American politician ever.

    NO MORE LIARS! Ron Paul 2012

  26. #25

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    Quote Originally Posted by MadOdorMachine View Post
    This article hits the nail right on the head. What he fails to tie into it though is the outsourcing of American jobs to China and India. This to the benefit of the corporations, but to the detriment of our economy. It's another backfire. What's even more disturbing is the fact that the U.S. is now a net exporter of oil. Couple that with the building of the Keystone pipeline which will mainly be exported. It will raise the price of oil. However, because it can still be refined domestically, oil companies by selling to America will make records amount of profit.

    Ron Paul made a comment once, that globalists are very patient. This is a classic case of problem, reaction, solution that started all the way back in the 1970's or even in the early 1900's when oil was chosen to power automobiles. When the dollar collapses, people will be begging for a solution and the masses will gladly accept the new form of currency to fix the problem.
    Outsourcing is occurring because a lot of the Western countries have simply outpriced their labor through minimum-wage & what not. Labor isn't a vastly different product from any other, when supply increases, prices fall & that's what happened when previous untapped Asian labor-pool become freely accessible but that's not necessarily a bad thing, problem is that their Western counterparts want to sell their labor at above the market-rate & use government force to establish monopoly/oligopoly on the market, which obviously leads to either the businesses (buyers) closing shop since it's no more profitable enough or simply leaving to a place where the laborers (sellers) are willing to accept the market-rate

    One thing is that even though a lot of people will talk about how people there are getting "low wages" but they are mostly "low" in NOMINAL terms, in terms of REAL PURCHASING-POWER, they're doing much better than it seems; just go to China or India if you ever get a chance & you'll realize that prices of a lot of stuff are really low. WHY? Because wages are low & it's the wages/salaries/etc that dictate prices because pretty much everything in the production-chain is tied to the price of physical/mental labor exerted by the people involved And lower wages beget lower prices, the bottomline remains that one's purchasing-power equals to the value of one's labor........UNLESS they engage in theft or use government force to monopolize the market as unions often do!
    For example, a business may hire 10 workers at $10 for his $100 capital to produce 10 goods, well, if supply of labor increases then it may be able to hire 20 workers at $5 to produce 20 goods, now, in NOMINAL terms they're earning "less" but in REAL terms, each one of their purchasing-power remains the SAME, that is, their purchasing-power is equal to the extent they have helped produce a product

    About the oil, what do you want? You want oil to be nationalized or something?
    If they didn't export then the jobs they create in the process wouldn't exist, not to mention, the profits they earn, they use them to buy & invest elsewhere, which in turn fuel other jobs elsewhere, if you ban exports then they'll simply stop producing oil because it won't profitable & they'll choose to invest somewhere else where they'll earn a better return on their investment, this rate-of-return is what indicates to the market-participants as to which goods & services are needed more urgently, so there's nothing evil about profits, they only help prioritize & allocate resources most efficiently to produce maximum goods & services - which is the ultimate point of the economy & which is what leads to prosperity & higher living-standards for people

    It's appalling that I'm having to defend the role of profits & market-prices on a forum dedicated to a person who supports the markets & capitalism!

    Just go through at least the topics like "How the Price System Works", "The Function of Profits" & "Minimum Wage Laws" in this PDF book - http://www.hacer.org/pdf/Hazlitt00.pdf
    By the way, whole of the book is worth a read, it's pretty & simple & it's written by the guy whom Ron Paul always gives credit for predicting decades in advance that Bretton-Woods Standard would collapse - Henry Hazlitt
    There is enormous inertia ó a tyranny of the status quo ó in private and especially governmental arrangements. Only a crisis ó actual or perceived ó produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  27. #26

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    ----Paul's energy policy will be focused on "free market" energy solutions. He says federal "regulations, corporate subsidies, and excessive taxation have distorted the market and resulted in government bureaucrats picking winners and losers," and have increased energy prices. He would repeal laws and regulations that impede energy production and would lower taxes on energy production.

    Paul has said that reducing U.S. dependence on foreign oil will simplify U.S. foreign policy and improve the "anemic economy at home." He opposes energy subsidies, which he views as a government handout, but he supports tax credits.----

    exporting our oil does not reduce our dependence on foreign oil and does not improve our anemic economy at home .

    dollars just move around , because of the velocity/mult of money jobs are created as the money is spent , cheaper oil / energy prices would put more money in the pockets of american consumers thus helping our " anemic economy ".

  28. #27

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    Quote Originally Posted by Zippyjuan View Post
    [/B]

    Petroleum producing countries which include


    presently hold $265 billion worth of US debt or 1.8% of total US debt. Last year the US had to borrow about four times that in the form of new debt. Not sure I would qualify that as "an endless pool of demand for US Treasuries" though it does put them as a group the third largest foreign holder of US debt. The list does leave off Canada ($55 billion in Treasury holdings though we buy lots of other things from Candada besides oil too) which is our largest source of imported oil and Mexico with $33.2 billion - our #2 supplier. http://www.treasury.gov/resource-cen...uments/mfh.txt Saudi Arabia, Kuwait and Iraq combined accounted for 18.2% of US oil imports.

    Now China has definately been buying US Treasuries (and is the biggest foreign holder of them) to keep their currency weak compared to the dollar- that is to keep the prices of exports to the US artificially low and give them a competitive advantage. If the yuan was allowed to float higher against the dollar, as would naturally occur if China was to convert the dollars and use them to buy something else not denominated in dollars, then the cost of goods from China would go up and it would become more competitive to start producing more of them in the US. This is the flip side of having a strong currency- it encourages more imports, fewer exports and fewer jobs here.
    this line of thinking rests on the keynesian assumption that prices cannot adjust in the short run. given that china has been manipulating its currency for sometime now I would argue that we have moved beyond the short run and that some other explaination is needed to explain the loss of jobs to china.
    "Government is the great fiction through which everybody endeavors to live at the expense of everybody else"

    - Claude Frťdťric Bastiat

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  29. #28

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    Quote Originally Posted by jbauer View Post
    The world needs us just as badly as we need them. What everyone so easily forgets to mention is we OWN the world food supply. We have the best farmland in the world by quite a margin.
    What do you mean "we", stranger? Do you, personally, own any of the food supply? Because if I owned any farmland, I would not be selling the food I produce to you just because you are an American. Not if the Chinese or icelanders or Norweigans are willing to pay me more than you will. So, while much of the world's food may be produced within the borders of the USA, that does not give US citizens any rights to it. In other words, YOU don't own the food supply. YOU will be forced to compete for it with the rest of the world. And as the dollar declines in value, your ability to compete for food on the world market declines without regard to where it is produced. It is very possible to have a scenario where American agriculture continues to produce abundant food while Americans starve because they can't afford to buy it. Think Monsanto is going to have pity on you? Guess again.

    The global dollar scam allowed Americans in general to live beyond their means for decades. When the dollar collapses, we will be required to live within our means. And that means that you, as an individual, will need to produce something of value to trade because you will no longer be able to ride on the power of the dollar.

    If you hope that American food production is going to sustain you, you had better make sure you really OWN some of it, else you will just be another mouth competing for food on a world market with money that is no big deal anymore.
    The proper concern of society is the preservation of individual freedom; the proper concern of the individual is the harmony of society.

    "Who would be free, themselves must strike the blow." - Byron

    "Who overcomes by force, hath overcome but half his foe." - Milton

  30. #29

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    Quote Originally Posted by ILUVRP View Post
    ----Paul's energy policy will be focused on "free market" energy solutions. He says federal "regulations, corporate subsidies, and excessive taxation have distorted the market and resulted in government bureaucrats picking winners and losers," and have increased energy prices. He would repeal laws and regulations that impede energy production and would lower taxes on energy production.

    Paul has said that reducing U.S. dependence on foreign oil will simplify U.S. foreign policy and improve the "anemic economy at home." He opposes energy subsidies, which he views as a government handout, but he supports tax credits.----

    exporting our oil does not reduce our dependence on foreign oil and does not improve our anemic economy at home .

    dollars just move around , because of the velocity/mult of money jobs are created as the money is spent , cheaper oil / energy prices would put more money in the pockets of american consumers thus helping our " anemic economy ".
    Another pathetic attempt at trying to insinuate that Ron Paul will endorse market-intervention or violate property-rights through government force

    He opposes subsidies, opposes regulations & bureaucracies & wants to allow the businesses to tap into local untapped energy resources - all it points towards is that he wants LESS government-intervention while commies want government dictatorship

    Here's something for any RATIONAL person to think about - Ron Paul goes against the Civil Rights Act JUST to defend the PRINCIPLE that PRIVATE-property owners should be able to discriminate against anyone based on race, sex, religion or whatever
    Now, THAT takes courage, to stand by one's principles of PRIVATE-PROPERTY & the fact government should NOT violate property-owners' rights; of course, he gets accused of being racist but he doesn't care because DEFENDING PRINCIPLE OF PRIVATE-PROPERTY is very important for him

    So it just goes without saying that Ron Paul is NOT going to violate PROPERTY-RIGHTS of oil-producers or meddle in any way with their RIGHT to export the oil that are investing in, producing & selling; it's just NOT going to happen but obviously commies would want to daydream that he'll do any such thing

    Now, that's the about the principle PROPERTY-RIGHTS but there's more to it than this.
    I'm sure he understands that banning export of oil is NOT going to work simply because just as workers are constantly looking for the best paid job, investors & businesses are always looking to make the most profits on their investment so if exports are banned in order to lower prices then they'll simply cut production because it's no more profitable enough to sell oil at lower prices & they'll put that money somewhere else where they can make higher profits so in the long-run, prices will remain where they are supposed to be according to the market situation.

    I know commies will never want to learn anything about the market & freedom & such "useless" stuff but anyone who WANTS TO LEARN ABOUT THE MARKET, please go through the following to learn how the market prioritizes & allocates economic resources through prices & profits
    Here's the whole book again - http://www.hacer.org/pdf/Hazlitt00.pdf

    HOW THE PRICE SYSTEM WORKS


    THE whole argument of this book may be summed up in the statement that in studying the effects of any given economic proposal we must trace not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences, and not merely the effects on some special group but the effects on everyone. It follows that it is foolish and misleading to concentrate our attention merely on some special point—to examine, for example, merely what happens in one industry without considering what happens in all. But it is precisely from the persistent and lazy habit of thinking only of some particular industry or process in isolation that the major fallacies of economics stem. These fallacies pervade not merely the arguments of the hired spokesmen of special interests, but the arguments even of some economists who pass as profound.

    It is on the fallacy of isolation, at bottom, that the "production-for-use-and-not-for-profžt" school is based, with its attack on the allegedly vicious "price system" The problem of production, say the adherents of this school, is solved.(This resounding error, as we shall see, is also the startingpoint of most currency cranks and share-the-wealth charlatans.) The problem of production is solved. The scientists, the efficiency experts, the engineers, the technicians, have solved it. They could turn out almost anything you cared to mention in huge and practically unlimited amounts. But, alas, the world is not ruled by the engineers, thinking only of production, but by the business men, thinking only of profit. The business men give their orders to the engineers, instead of vice versa. These business men will turn out any object as long as there is a profit in doing so, but the moment there is no longer a profit in making that article, the wicked business men will stop making it, though many people's wants are unsatisfied, and the world is crying for more goods.

    There are so many fallacies in this view that they cannot all be disentangled at once. But the central error, as we have hinted, comes from looking at only one industry, or even at several industries in turn, as if each of them existed in isolation. Each of them in fact exists in relation to all the others, and every important decision made in it is affected by and affects the decisions made in all the others.

    We can understand this better if we understand the basic problem that business collectively has to solve. To simplify this as much as possible, let us consider the problem that confronts a Robinson Crusoe on his desert island. His wants at first seem endless. He is soaked with rain; he shivers from cold; he suffers from hunger and thirst. He needs everything: drinking water, food, a roof over his head, protection from animals, a fire, a soft place to lie down. It is impossible for him to satisfy all these needs at once; he has not the time, energy or resources. He must attend immediately to the most pressing need. He suffers most, say, from thirst. He hollows out a place in the sand to collect rain water, or builds some crude receptacle. When he has provided for only a small water supply, however, he must turn to finding food before he tries to improve this. He can try to fish; but to do this he needs either a hook and line, or a net, and he must set to work on these. But everything he does delays or prevents him from doing something else only a little less urgent. He is faced constantly by the problem of alternative applications of his time and labor.

    A Swiss Family Robinson, perhaps, finds this problem a little easier to solve. It has more mouths to feed, but it also has more hands to work for them. It can practice division and specialization of labor. The father hunts; the mother prepares the food; the children collect firewood. But even the family cannot afford to have one member of it doing endlessly the same thing, regardless of the relative urgency of the common need he supplies and the urgency of other needs still unfilled. When the children have gathered a certain pile of firewood, they cannot be used simply to increase the pile. It is soon time for one of them to be sent, say, for more water. The family too has the constant problem of choosing among alternative applications of labor, and, if it is lucky enough to have acquired guns, fishing
    tackle, a boat, axes, saws and so on, of choosing among alternative applications of labor and capital. It would be considered unspeakably silly for the wood-gathering member of the family to complain that they could gather more firewood if his brother helped him all day, instead of getting the fish that were needed for the family dinner. It is recognized clearly in the case of an isolated individual or family that one occupation can expand only at the expense of all other occupations.

    Elementary illustrations like this are sometimes ridiculed as "Crusoe economics." Unfortunately, they are ridiculed most by those who most need them, who fail to understand the particular principle illustrated even in this simple form, or who lose track of that principle completely when they come to examine the bewildering complications of a great modern economic society.

    Let us now turn to such a society. How is the problem of alternative applications of labor and capital, to meet thousands of different needs and wants of different urgencies, solved in such a society? It is solved precisely through the price system. It is solved through the constantly changing interrelationships of costs of production, prices and profits.

    Prices are fixed through the relationship of supply and demand, and in turn affect supply and demand. When people want more of an article, they offer more for it. The price goes up. This increases the profits of those who make the article. Because it is now more profitable to make that article than others, the people already in the business expand their production of it, and more people are attracted to the business. This increased supply then reduces the price and reduces the profit margin, until the profit margin on that article once more falls to the general level of profits (relative risks considered) in other industries. Or the demand for that article may fall; or the supply of it may be increased to such a point that its price drops to a level where there is less profit in making it than in making other articles; or perhaps there is an actual loss in making it. In this case the "marginal" producers, that is, the producers
    who are least efficient, or whose costs of production are highest, will be driven out of business altogether. The product will now be made only by the more efficient producers who operate on lower costs. The supply of that
    commodity will also drop, or will at least cease to expand.


    This process is the origin of the belief that prices are determined by costs of production. The doctrine, stated in this form, is not true. Prices are determined by supply and demand, and demand is determined by how intensely people want a commodity and what they have to offer in exchange for it. It is true that supply is in part determined by costs of production. What a commodity has cost to produce in the past cannot determine its value. That will depend on the present relationship of supply and demand. But the expectations of business men concerning what a commodity will cost to produce in the future, and what its future price will be, will determine how much of it will be constant tendency for the price of a commodity and its marginal cost of production to equal each other, but not
    because that marginal cost of production directly determines the price.

    The private enterprise system, then, might be compared to thousands of machines, each regulated by its own quasiautomatic governor, yet with these machines and their governors all interconnected and influencing each other, so that they act in effect like one great machine. Most of us must have noticed the automatic "governor" on a steam engine. It usually consists of two balls or weights which work by centrifugal force. As the speed of the engine increases, these balls fly away from the rod to which they are attached and so automatically narrow or close off a throttle valve which regulates the intake of steam and thus slows down the engine. If the engine goes too slowly, on the other hand, the balls drop, widen the throttle valve, and increase the engine's speed. Thus every departure from
    the desired speed itself sets in motion the forces that tend to correct that departure.

    It is precisely in this way that the relative supply of thousands of different commodities is regulated under the system of competitive private enterprise. When people want more of a commodity, their competitive bidding raises its price. This increases the profits of the producers who make that product. This stimulates them to increase their production. It leads others to stop making some of the products they previously made, and turn to making the product that offers them the better return. But this increases the supply of that commodity at the same time that it reduces the supply of some other commodities. The price of that product therefore falls in relation to the price of other products, and the stimulus to the relative increase in its production disappears. In the same way, if the demand falls off for some product, its price and the profit in making it go lower, and its production declines.


    It is this last development that scandalizes those who do not understand the "price system" they denounce. They accuse it of creating scarcity. Why, they ask indignantly, should manufacturers cut off the production of shoes at the point where it becomes unprofitable to produce any more? Why should they be guided merely by their own profits? Why should they be guided by the market? Why do they not produce shoes to the "full capacity of modern technical processes"? The price system and private enterprise, conclude the "production-for-use" philosophers, are merely a form of "scarcity economics."

    These questions and conclusions stem from the fallacy of looking at one industry in isolation, of looking at the tree and ignoring the forest. Up to a certain point it is necessary to produce shoes. But it is also necessary to produce coats, shirts, trousers, homes, plows, shovels, factories, bridges, milk and bread. It would be idiotic to go on piling up mountains of surplus shoes, simply because we could do it, while hundreds of more urgent needs went unfilled.

    Now in an economy in equilibrium, a given industry can expand only at the expense of other industries. For at any moment the factors of production are limited. One industry can be expanded only by diverting to it labor, land and capital that would otherwise be employed in other industries. And when a given industry shrinks, or stops expanding its output, it does not necessarily mean that there has been any net decline in aggregate production. The shrinkage at that point may have merely released labor and capital to permit the expansion of other industries. It is erroneous to conclude, therefore, that a shrinkage of production in one line necessarily means a shrinkage in total production.

    Everything, in short, is produced at the expense of foregoing something else. Costs of production themselves, in fact, might be defined as the things that are given up (the leisure and pleasures, the raw materials with alternative potential uses) in order to create the thing that is made.

    It follows that it is just as essential for the health of a dynamic economy that dying industries should be allowed to die as that growing industries should be allowed to grow. For the dying industries absorb labor and capital that should be released for the growing industries. It is only the much vilified price system that solves the enormously complicated problem of deciding precisely how much of tens of thousands of different commodities and services should be produced in relation to each other. These otherwise bewildering equations are solved quasi-automatically by the system of prices, profits and costs. They are solved by this system incomparably better than any group of bureaucrats could solve them. For they are solved by a system under which each consumer makes his own demand and casts a fresh vote, or a dozen fresh votes, every day; whereas bureaucrats would try to solve it by having made for the consumers, not what the consumers themselves wanted, but what the bureaucrats decided was good for them.

    Yet though the bureaucrats do not understand the quasiautomatic system of the market, they are always disturbed by it. They are always trying to improve it or correct it, usually in the interests of some wailing pressure group. What some of the results of their intervention is, we shall examine in succeeding chapters.
    Last edited by Paul Or Nothing II; 04-26-2012 at 12:53 PM.
    There is enormous inertia ó a tyranny of the status quo ó in private and especially governmental arrangements. Only a crisis ó actual or perceived ó produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  31. #30
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    Quote Originally Posted by enter`name`here View Post
    this line of thinking rests on the keynesian assumption that prices cannot adjust in the short run. given that china has been manipulating its currency for sometime now I would argue that we have moved beyond the short run and that some other explaination is needed to explain the loss of jobs to china.
    Prices can adjust if the currency is also allowed to adjust but since China keeps their currency at an artificially low level prices are not allowed to adjust.

    Under normal trade, if the US is running a trade deficit with a country, we are buying a lot of goods from them and using dollars to make the purchases. The other country typically has no use for the dollars they take in and sell them for their own currency which increases the demand for their own and increases the supply of dollars. This causes the value of their currency to rise against the dollar. As their currency rises against the dollar, the prices we in the US would pay for goods from them rises due to the changes in the exchange rate. China is keeping their dollars (by buying US dollar denominated things like US Treasury notes) as dollars and not converting them so the exchange rate does not change as it would if there was a free market. This keeps prices artificially low for US buyers of Chinese goods and keeps prices of our exports to them artificially high. This is an indirect government subsidy to its producers in China and distorts the market.

    If we are importing more goods then we aren't producing as much at home as we would. If we are exporting less we are producing less to export. Both of these mean fewer jobs here and more jobs in the other country. Labor is effectively exported.

    It is true that we get lower priced goods but the exchange is that we have fewer people working. Now if this "frees up labor to do other things" then we should have lots of jobs being created today since we have had so much labor freed up (as in our high unemployment rate).
    I am Zippy and I approve of this message. But you don't have to.

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